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7 Things to Know About the Stock Market Plunge

By Sean Williams - Feb 6, 2018 at 6:09AM

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Here's what investors should know following the Dow's historic tumble and the S&P 500's worst day in seven years.

History was made on Monday, with the Dow Jones Industrial Average (^DJI 0.92%), America's most iconic index, tumbling a record-breaking 1,175 points by the time Wall Street closed for business at 4 p.m. EST. This, the largest point decline ever in the Dow, follows up what had been the sixth-biggest point decline in its history on Friday -- a 666-point shellacking.

The other major indexes didn't fare well, either. The broad-based S&P 500 (^GSPC 1.59%) fell 113 points, or more than 4%, while the technology-focused Nasdaq Composite shed over 273 points, or 3.8%.

Man covering his eyes and holding up a tablet showing a plunging stock chart.

Image source: Getty Images.

Interestingly enough, the worst day in years for the major indexes had no one single event that could be pointed to for sending stocks lower. On Friday, stocks suffered as a result of weak guidance from leading tech names like Apple. On Monday, the concern had more to do with the Atlanta Federal Reserve forecasting first-quarter GDP growth of as much as 5.4%. Faster growth means the potential for higher inflation and thus more aggressive interest rate hikes.

Additionally, computer-driven selling was also partially blamed for the spike lower in stocks on Monday. Computers, which are programmed to sell at specific levels, have caused a flash-crash in the stock market before; Monday may have been just the latest such instance.

Seven things to know about Monday's stock market plunge

But at the end of the day, panicking is the last thing investors should be doing. Let's take a step away from the doomsday headlines from most news outlets and look at seven things you should know about the latest stock market plunge.

A table highlighting the 20 largest point and percentage moves in the Dow.

Data source: Wikipedia, The Wall Street Journal, Dow Jones. Table by author.

1. It wasn't really a plunge

The first thing investors should wrap their minds around is the context of the word "plunge," because the 1,175-point decline by the Dow, and worst day for the S&P 500 since 2011, wasn't really a plunge. Though it was a bigger single-day loss than investors have been accustomed to in recent years, the 1,175-point drop in the Dow still didn't even come close to cracking its 20-largest percentage declines of all time. The Dow would have needed to fall close to 1,800 points just to crack into the top 20 worst single-day percentage declines -- many of which occurred during the Great Depression.

2. We'll never be able to foresee corrections coming

Second, understand that no matter how much we may analyze the stock market, we'll never know with any certainty what'll be responsible for the next stock market correction and, more importantly, when that correction will occur.

Back in July, we looked at 10 catalysts that could cause the stock market to crash, and down at No. 7, I alluded to a technology-driven flash-crash. Though that may have happened on Monday, I had no clue which of these 10 reasons would be the cause of a stock market decline, nor did I have any idea that Feb. 2, 2018, through Feb. 5, 2018, would be when that correction would come about.

3. Stock market corrections are pretty common

Next, you should understand that stock market corrections have happened a lot throughout history. Yardeni Research aggregated data for the S&P 500 since 1950 and found that there have been 35 corrections of at least 10% when rounded to the nearest whole number. That works out to an average of one correction every two years. As we all know, the stock market doesn't adhere to averages, but it's a pretty telltale sign that corrections are more common than you probably realize.

A cheering young woman in front of a rising chart.

Image source: Getty Images.

4. Stocks spend far more time rallying than declining

However, in spite of stock market corrections being commonplace, stocks historically spend far more time in rally mode than they do declining. For instance, as of August 2015, the S&P 500 had spent more than 17,300 days in rally mode since 1950 (and has pushed beyond 18,000 days since). Comparatively, just 6,587 of those days were spent in corrections or bear markets. In other words, the average stock market correction only tends to last around 200 days, whereas the average bull market rally is considerably longer. 

5. It's a reminder to review your holdings

A large drop in the stock market is also a great reminder to review your stock holdings. Truthfully, any time is a good time to review your portfolio, but headlines suggesting doomsday on Wall Street often do the trick.

Primarily, you should be reviewing your holdings to ensure that your investment thesis still holds water. If the reason(s) you bought the companies in your portfolio is still true, then a relatively minor percentage drop in stocks more than likely isn't a good reason to sell.

6. Staying the course is your smartest move

You probably knew this was coming, but you should be well aware that the smartest move you can make is to stay the course. Given that stocks spend far more time rallying than they do declining, it's likely no surprise that the stock market has risen by about 7% annually throughout history, inclusive of dividend reinvestment and when adjusted for inflation.

What's more, some of the biggest point and/or percentage increases in history for the stock market have occurred within a matter of weeks of its biggest point or percentage declines. No one can pinpoint with any accuracy when those big gains or declines will occur -- and missing just a handful of the market's best days could significantly reduce your long-term earning potential.

A businessman putting hundred dollar bills into outstretched hands.

Image source: Getty Images.

7. Dividend stocks are always a smart choice

Finally, when the stock market is plunging, consider adding dividend stocks to your portfolio. Though it should be stated that not all dividend stocks are created equally, most offer time-tested business models and are thus a beacon of profitability. It's unlikely that a company would continue to pay a dividend if it didn't foresee a positive long-term outlook. Therefore, dividends can help partially hedge the downside experienced during a correction, as well as help build wealth vis-a-vis reinvestment.

Long story short, panic is the last thing that should be on your mind right now.

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Dow Jones Industrial Average (Price Return) Stock Quote
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